Crude oil prices experienced a dramatic reversal on Wednesday, with Brent Crude plunging 8% to $103.3 per barrel after closing at $112 per barrel on Tuesday. As of 8:50 p.m. IST, Brent traded 6% lower at $105.36 per barrel, while West Texas Intermediate slipped below $100 per barrel, touching an intraday low of $97.06 after falling 8%. According to latest reports, the sharp decline came after an Iranian Foreign Ministry spokesperson claimed that Iran-US truce talks are still underway via Pakistani mediators. The West Texas Intermediate also traded 4.54% lower at $99.6 per barrel as of 9 p.m. IST. These developments represent a significant shift from the previous surge to $126 per barrel that had been driven by President Trump's confirmation of Venezuelan oil flow to US refineries.
The latest developments show American President Donald Trump reportedly said that Tehran and Washington were in their 'final stages of talk', according to multiple reports. Similar reports indicated that serious efforts are underway to finalise a draft agreement between the warring groups and that Pakistan's army chief may visit Iran on Thursday to announce that the final draft agreement has been completed. The report further added that the next round of negotiations will be held in Islamabad after the Hajj season on May 30, 2026. These diplomatic efforts come after Iran's Supreme Leader Mojtaba Khamenei said the country is mounting a unique historical resistance against the US and Israel amid the ongoing conflict in the region. The Iranian leader expressed gratitude for the unity of the nation while acknowledging that the ongoing war had made the responsibilities of government officials heavier than before.
As reported by NDTV, Gopinath warned that a spike to those levels would severely hurt both the global economy and India, which relies heavily on the Middle East for energy imports. She called the situation the 'biggest supply shock ever faced by the world' and emphasized that if oil reaches $140 per barrel, it could trigger significant demand destruction and inflict deeper damage on the world economy. The economist cautioned that even if the conflict is resolved soon, oil prices are unlikely to return to pre-conflict levels quickly because production facilities have been damaged and restoring output will take time. 'The only hope is that we don't go to $140,' she said, adding that the best-case scenario could still see crude at around $85 per barrel by the end of the year. According to Gopinath, 'We are not getting back to $65 a barrel that was there before the conflict'. She warned that 'If it goes on for another month, India, along with many other countries, are facing a much worse situation' and emphasized that 'If it goes on for another two or three months, the right thing to do is to intervene now'.
On the policy response to rising oil prices, Gopinath emphasized that the right approach would be to cut back usage, which would require higher prices to be passed through to consumers to some extent. She warned that governments may not pass the entire increase on to households, with some burden likely absorbed through fiscal support, but cautioned against excessive subsidies if the conflict drags on. 'If this conflict continues for a few more weeks, the right reaction is for there to be a cutback in usage of all these fields,' she said, explaining that 'the petro prices are expected to rise further'. Gopinath warned that 'Some of it will be absorbed by the oil marketing companies, (and some) by the government because it will run a somewhat larger fiscal deficit in the near term'. She suggested that 'the tough part is not knowing how long then war will continue' and explained that 'If you start providing a lot of support right now, then the fiscal bill is going to grow very, very large.' Instead, she suggested that governments provide targeted support, including cash transfers for lower-income households, while still allowing some pass-through of higher fuel prices.
As reported by NDTV, Gopinath warned that rising oil prices are also putting pressure on the rupee, but argued that allowing the currency to adjust naturally could help reduce imports and support exports over time. She explained that 'With depreciation of the rupee, it signals lower imports' and higher prices naturally curb import demand while export competitiveness could improve gradually. However, she cautioned against artificially supporting the rupee, saying investor confidence could weaken if the currency is not aligned with economic fundamentals. The economist noted that 'With depreciation of the rupee, it signals lower imports' and higher prices naturally curb import demand while export competitiveness could improve gradually. She explained that 'the big fallout of this will be a cutback in imports. But at the same time, exports will also go up and so would the earnings, so that companies will see higher profit margins'. She warned that 'If it is seen that the rupee is not really at its true fundamental level, but is being artificially held out, then you will see less demand for rupee assets and that will be kind of self-defeating because that would put further pressure on the rupee'. The economist concluded that 'at this current moment, it seems that the right policy would be to let the currency, let the rupee adjust'.
